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As much as €152 billion is spent across Europe supporting businesses: but does it work?

By Teo Firpo and Thomas Beevers on Friday, 11 March 2016.

Few in the European Union would deny that governments could be supporting businesses better. With sluggish growth forecasts, and unemployment still high in many countries, many have urged EU institutions and national governments to do more for the EU’s struggling private sector. A number of public officials have answered the call, promising to spur startup growth, cut red tape and boost investment in SMEs. But how much are they really doing? And is it working?

Case study: The UK

At IGL, we wanted to investigate the extent of public spending on business support. We started from the UK government, which has been vocal in its commitment to open and accessible data on public spending. As it turns out, giving a precise number can be difficult – not only because government spending figures are not easy to collect and compare, but also because it is hard to decide what counts as business support and what doesn’t. To capture the variety of ways in which a government can support businesses, we settled on a relatively broad definition – any programme aimed primarily at fostering the growth, performance or productivity of businesses or entrepreneurs[1].

Our results showed that the UK government spent £9.8 billion in 2013-2014. A majority of the spending occurred through tax relief, with in-kind support programmes (e.g. business advice) being the smallest item.

How about the rest of Europe?

Obtaining a proper estimate for each European country would be a monumental task – and often times nearly impossible, as many countries do not publish detailed spending figures. We therefore decided to carry out a back-of-the-envelope calculation based on our UK figures, together with some simple assumptions about spending across EU governments.

We started by calculating the £9.8 billion figure for the UK as percentage of British GDP (it worked out to about 0.06%[2]). We then assumed all other countries spent the same proportion of their GDP on business support – and estimated their business supporting spending accordingly. The obvious shortcoming with this approach is that each EU member state has different approaches to government spending (France’s government expenditure is 57.5% of GDP; whilst Romania only amounts to 34.9%[3]). To take this into account, we also did a similar calculation by looking at UK business support as percentage of government expenditure. To capture the different approaches to state intervention in the private sector, we also calculated the same numbers based on State Aid figures – a measure of state support to businesses declared to the EU in compliance with its strict competition rules. This led us to three Europe-wide estimates: €75.6 billion for the estimate based on GDP, €81.9 billion when using government spending, and €136.5 billion for the estimate based on State Aid figures[4].

The map below illustrates the estimates by country. To check GDP or government spending based estimates, click on 'Visibile layers'. All figures are in millions of euros.

On top of spending by member states, the EU budget has a number of items ear-marked for activities that support business and entrepreneurship. We therefore wanted to add up some of the main components. The European Structural and Investment Funds, the main funding instrument of the EU, has a number of schemes dedicated to businesses. Thanks to the Commission’s helpful Open Data Portal, we were able to calculate a conservative estimate of €84.5 billion going to the private sector, mainly through the ‘SME Competitiveness’ and ‘Research and Innovation’ schemes[5]. On top of that, Horizon 2020, the large funding scheme launched in 2014 set to last until 2020, includes €3 billion to support high-growth potential small companies through the SME Instrument, as well as €2.8 billion ‘Access to Risk Finance’, a set of loans and guarantees to finance innovative companies and entrepreneurs[6].

If our estimates are broadly correct, total EU-wide spending on business support could be as high as €152 billion. To put that figure in perspective, Portugal’s GDP was €170 billion in the same period.

Understanding the impact of business support spending

That is a mighty large number. Given the importance of boosting the continent’s firms and innovation, it is crucial that this money is spent on effective schemes. At IGL we have long argued the need to ensure that some budget is set aside to properly evaluate the impact of each programme. The Commission is already vamping up efforts to achieve this, primarily through new State Aid regulation that requires member states to include robust evaluations in their support schemes. This goes hand in hand with the Commission’s commitment to opening up data sources to allow better transparency and accountability of programmes such as Horizon 2020.

We also think that business support schemes should get more experimental. This would ensure that government support programmes are based on the latest thinking and have a demonstrable impact. Some member states, such as Finland, are already attempting to introduce a culture of piloting new policies across levels of government. We believe the Commission could lead the way by setting up a European experimentation fund for innovation and growth. This pilot fund could serve to identify and trial the most promising ideas to support innovation, entrepreneurship and growth, taking advantage of the scale of the EU to maximise network effects and increase learning. Specifically, it would provide funding to organisations with innovative support schemes, with the condition that new interventions are trialled on a small scale and evaluated rigorously (for instance, using randomised controlled trials) in order to find out what works. The lessons learnt would help to make better decisions on which schemes need to be scaled-up as well as on the potential benefits of replicating them across the EU.

With a more experimental approach and better evaluation, Europe could give a much needed boost to its economy.

[2] To be precise, we used a slightly different figure. The £9.8 billion included a number of EU-funded projects; since EU-funding across member states varies significantly, keeping them in would have distorted the overall amount. As a result, we subtracted these projects from the total figure, leaving us with a total of £9.1 billion. We then used this number to calculate all the estimates.

[4] The State Aid estimates are subject to wider variation, as there are strong changes year to year and not all countries report State Aid to the same extent. They should therefore be interpreted with care.

[5] This estimate comes from two figures. The EAFRD dedicates €27.5 billion to the ‘SME Competitiveness’ branch, while €57 billion from the ERDF will go ‘explicitly’ to SMEs (presumably through the ‘Research and Innovation’ and ‘SME Competitiveness’ schemes).

[6] We divided the both this estimates by six, to estimate yearly spending (since both budgets run from 2014-2020). This assumes funds are spent roughly equally each year.